Personal Finance - Loans by fanzhongqing


									Personal Finance
Dusty Wilson

Note: Homework assignment on page 4.

Most loan payments are calculated the same way. While we will focus on houses through
these examples, the mathematics would be the same for an auto or school loan.

The loan formula:

                   r                            P is the payment
                  L                             L is the size of the loan
          P       n        where
                         nt                     r is the annual interest rate
                 r 
             1    1                           n is the number of payments per year
                 n                              t is the term of the loan (in years)

To calculate on a scientific calculator:

   1.) Calculate L  r  n = ____________ (a big number to two decimal places)

   2.) Calculate r  n  1 = ____________ (just over 1 to six decimal places)

   3.) Calculate n  t = ____________ (a negative number)

                       3.
   4.) Calculate  2.        = ____________ (close to 0 to four decimal places)

   5.) Calculate 1   4. = ____________ (a bit under 1 to four decimal places)

   6.) Calculate 1.   5. = ____________ (this is the payment to two decimal places)

Ideally, you would understand how to enter this formula into your calculator without
having to write down any intermediary values. However, we will focus our
conversations on results and the interpretations rather than on the order of operations.

To check your results and/or do your own research, use an online loan calculator such as
the one on Yahoo’s page:

                                           Page 1 of 13
Example 1: $317,950
3 Bed, 2 Bath
1,790 Sq. Ft.
0.17 Acres

Single Family Property, Area: Des
Moines/Redondo, Subdivision: Sky Hill
Add N 85 FT, County: King,
Approximately 0.16 acre(s), Lot is 7225 sq.
ft., Year Built: 1983, Fireplace(s)
Assume zero down payment and a 30 year
fixed rate mortgage at 6%.

Monthly payment: ________________

Total cost of the house: _______________

Interest over 30 years: ________________

Example 2: $314,000
3 Bed, 2 Bath
0.19 Acres

Single Family Property, Area: Des
Moines/Redondo, Subdivision: Harvey,
County: King, Approximately 0.18 acre(s),
Lot is 8080 sq. ft., Year Built: 1995,
Assume a 10% down payment and a 30
year fixed rate mortgage at 6%.

Down payment: ________________

Loan amount: _______________

Monthly payment: ________________

Total cost of the house: _______________

Interest over 30 years: ________________

                                      Page 2 of 13
Example 3: $265,000
3 Bed, 2 Bath
0.2 Acres

Single Family Property, Area: Kent,
Subdivision: West Hill, County: King, Lot
is 8750 sq. ft., Year Built: 1967, View,
Garage, Fireplace(s)
Assume a 20% down payment and a 15
year fixed rate mortgage at 5.5% with
monthly payments.

Down payment: ________________

Loan amount: _______________

Monthly payment: ________________

Total cost of the house: _______________

Interest over 30 years: ________________

                                     Page 3 of 13

  1. Find a copy of mortgage papers, preferably your own and make a photo copy to
      work with.

     If you do not have access to loan papers (i.e., you and everyone else in your
         immediate family rent or own outright, then please talk to me about

  2. Highlight all of the financial terms you can find on your papers.

  3. Read the links below on mortgage terms and see if you can find definitions for all
      the terms you highlighted.

     Home Buyer's Vocabulary (

     Investing Vocabulary (

  4. Using the Loan Amortization formula, compute what you think the mortgage
      payment should be for your loan terms. How does this compare with the payment
      declared by the mortgage?

  5. Compute the payment for another period of time. For example, if you have a 30-
      year mortgage, then compute the payment for a 15-year mortgage.

  6. For the two time periods computed above, find the total amount of payments
      (money) you would pay over the life of the loan. What did you discover?

  7. Locate two internet sites (not mentioned in this document) that have good
      information about mortgages. Include the URLs in your paper in part (8.).

  8. Write a one page paper on what you have learned about mortgages (yours and in
      general) that you did not know prior to this class. Submit to the instructor by the
      due date.

                                     Page 4 of 13
An important budgeting question is, “How large a loan can you afford.” In the loan
industry, this is done thru pre-qualification and pre-approval. As we work thru this,
remember the Guideline Budgets where a family of 4 in a high cost area with an annual
income of $55,000 and net spendable income of $40,000 allotted 50% of their net
spendable income for housing and 4% to debts. What loan amount would we pre-qualify
this family for?

Analyzing Your Debt to Income Ratio
by Janet Wickell

The ratio affects your buying power...

Your debt to income ratio is a simple way of showing what percentage of your income is
available for a mortgage payment after all other continuing obligations are met. The ratio
is one of the many things a lender considers before approving your home loan.

You may see conventional loan debt limits referred to as the 28/36 qualifying ratio.
Those numbers refer to two percentages that are used to examine two aspects of your
debt load.

The First Number, 28%

This number indicates the maximum percentage of your monthly gross income that the
lender allows for housing expenses. The total includes payments on the loan principal and
interest, private mortgage insurance, hazard insurance, property taxes, and homeowner's
association dues. (Often referred to by the acronym PITI.)

The Second Number, 36%

This number refers to the maximum percentage of your monthly gross income that the
lender allows for housing expenses plus recurring debt.

Recurring debt includes credit card payments, child support, car loans, and other
obligations that will not be paid off within a relatively short period of time (6-10 months).

Debt to Income Example

Yearly Gross Income = $45,000 / Divided by 12 = $3,750 per month income

$3,750 Monthly Income x .28 = $1,050 allowed for housing expense

$3,750 Monthly Income x .36 = $1,350 allowed for housing expense plus recurring debt.

                                       Page 5 of 13
To make life more exciting, there are a variety of types of loans available. What is listed
below is just a small sampling.

Today's Rates for Selected Products (
The quotes below are only a sample of the wide variety of loan programs and rates available.
                            Interest       Discount                  Monthly Mortgage
        Loan Type                                         APR
                              Rate          Points                    Payment (P&I)

10 Year Fixed              5.500%      0.125             5.848% $2,605

15 Year Fixed              5.500%      0.125             5.745% $1,961

20 Year Fixed              5.875%      0.250             6.089% $1,702

30 Year Fixed              6.000%      0.125             6.150% $1,439

40 Year Fixed              6.500%      -0.125            6.613% $1,405

Interest First 10/20
                           6.500%      0.250             6.653% $1,300

3/1 Year ARM               5.000%      0                 6.295% $1,288

5/1 Year ARM               5.500%      -0.125            6.265% $1,363

7/1 Year ARM               5.750%      -0.125            6.268% $1,401

Interest First 5/1 Year
                           5.875%      -0.125            6.413% $1,175

Jumbo 15 Year Fixed        5.750%      0.125             5.988% $3,488

Jumbo 30 Year Fixed        6.625%      0.125             6.777% $2,689

Interest First 15/15
                           7.125%      0.125             7.265% $2,494
Fixed Jumbo

Jumbo 5/1 ARM              5.750%      -0.125            6.508% $2,451

Jumbo 7/1 ARM              6.125%      -0.125            6.576% $2,552

Interest First Jumbo
                           6.125%      -0.125            6.657% $2,144
5/1 Year ARM

Rates effective as of: 11/9/2007 9:41:00 AM (PT).

Each loan is complicated by the potential for points

                                                         Estimated   Closing   Requested   Loan      Monthly
Loan                      Discount         Origination
        Interest Rate                                    Closing     Cost      Loan        Amount    Mortgage APR
Type                      Points           Fee
                                                         Costs       Details   Amount      Available (P&I)

Year      5.875%           0.750           1.000%        $9,138      Details   $240,000    $240,000   $1,420   6.076%

Year      6.000%           0.125           1.000%        $7,649      Details   $240,000    $240,000   $1,439   6.143%

Year      6.125%           -0.375          1.000%        $6,460      Details   $240,000    $240,000   $1,458   6.221%

Year      6.250%           -0.750          1.000%        $5,570      Details   $240,000    $240,000   $1,478   6.311%

                                                Page 6 of 13
BECU Loan Options

Mortgage Type:

30 Year Fixed


 Fixed rate of interest.
 Level principal and interest payments for the full term of the loan.
 No risk that changing market conditions will increase your monthly payments

Best Choice If:

   You   plan on staying in the home long-term.
   You   think interest rates will increase.
   You   don't expect your income to increase significantly over the coming years.
   You   need to qualify for the largest loan possible.


 You end up paying more in interest charges over the life of the loan.
 Benefits of the fixed rate are not realized until after the 10th year. (10/1 ARM is a better
option if loan is paid-off within 10 years.)

Sample Payment:

The Monthly Mortgage Payment (P&I) is based on a purchase price of $300,000 for an
owner-occupied conforming property with a 20% down payment and a 30 year term. The
calculations assume member-paid closing costs, including points, which typically range from
2-3% of the loan amount.

                                            Page 7 of 13
In addition to paying interest on your loan, there are closing costs that must be paid up
front (in addition to the down payment) in order to finalize the loan. These closing costs
include: loan origination fees, appraisals, title insurance, and a whole lot more. These
costs are about 3% of the loan amount and must be paid up front (one way or another).

Example 4: $265,000 (ex. 3 revisited)
3 Bed, 2 Bath
0.2 Acres

Single Family Property, Area: Kent,
Subdivision: West Hill, County: King, Lot
is 8750 sq. ft., Year Built: 1967, View,
Garage, Fireplace(s)
Assume a 20% down payment and a 15
year fixed rate mortgage at 5.5% with
monthly payments.

Closing costs (est.): _______________

Example 5: $317,950 (ex 1 revisited)
3 Bed, 2 Bath
1,790 Sq. Ft.
0.17 Acres

Single Family Property, Area: Des
Moines/Redondo, Subdivision: Sky Hill
Add N 85 FT, County: King,
Approximately 0.16 acre(s), Lot is 7225 sq.
ft., Year Built: 1983, Fireplace(s)
Assume zero down payment and that
closing costs are rolled into the loan which
is a 30 year fixed rate mortgage at 6%.

Closing Costs: ________________                Monthly payment: ________________

Loan Amount: ________________                  Total cost of the house: _______________

                                               Interest over 30 years: ________________

                                       Page 8 of 13
Estimated Closing Costs ( $300,000 house w/20% down)
Below are estimated fees associated with closing on this product and loan amount. These costs
represent our best estimate at this stage of the application process. As we learn more about your
property and loan preferences, these estimated costs may change. (11/9/07)

                                                  Loan Details

 Loan Amount:                         $240,000.00                                      LTV: 80.000%
 Purchase Price:                      $300,000.00
 Loan Program:                        30 Year Fixed
 Interest Rate:                       6.000%                                           APR: 6.143%

                                          Estimated Closing Costs
 Discount Points                                           $300.00           0.125%
 Origination Fee                                           $2,400.00         1.000%
 Title Insurance                                           $475.00
 Recording Fee                                             $100.00
 Escrow Fee                                                $700.00
 Tax Registration Service Fee                              $63.00
 Application Fee                                           $350.00

                                          Estimated Closing Costs: $4,388.00
              *Items paid outside of closing. These amounts are not included in the total closing costs.

                                             Prepaids & Reserves
 Hazard Insurance Premium                               2 Months           @$63.00               $126.00
 Hazard Insurance (1st Year)                                               @$750.00              $750.00
 County Property Taxes                                  6 Months           @$312.00              $1,872.00
 Interim Interest                                       13 Days            @$39.45               $512.85

                                                           Total Prepaids & Reserves: $3,260.85

                     Total Closing Costs, Prepaids, and Reserves: $7,648.85

           Monthly Housing Costs:                                      Estimated Funds to Close:
 P&I                                       $1,438.92        Purchase Price                       $300,000.00
 Hazard Insurance Premium                  $63.00           - Loan Amount                        $240,000.00
 County Property Taxes                     $312.00
                                                            = Down Payment                       $60,000.00
         Total Monthly Housing: $1,813.92                   + Total Closing Costs                $7,648.85

                                                            = Funds to Close                     $67,648.85

                                                Page 9 of 13
Save Thousands on Closing Costs
March 9, 2006

Author's note: Thursday I did a story about real estate closing costs on "Good Morning
America." As I walked off the set at the end, the crew gathered around me and started
peppering me with further questions about the topic. I realized I had struck a nerve!

After all, often I can give advice that saves you tens or hundreds of dollars, but this is a
chance to save THOUSANDS! So I decided to continue the conversation about closing
costs in my weekly column.

Every year, Americans spend $110 billion buying houses. I'm not talking about how
much the homes themselves cost. I'm talking about how much the loans cost. American
home buyers routinely pay abusive closing costs. There are two kinds: real fees that are
inflated and junk fees that are just plain made up. It doesn't have to be that way. If you
know what you're doing, you can save thousands of dollars when you go to the settlement

Here's the problem: when you apply for a loan, the mortgage company gives you a list of
the fees you can expect. It's called a good faith estimate. What a joke! All too often these
estimates aren't given "in good faith" at all. You see, there's no law requiring the
mortgage company to stick to its good faith estimate. So when you go to closing a month
later, often you'll find the fees have risen sharply or new fees have been added. The
Department of Housing and Urban Development has been fighting to prevent lenders,
brokers and title agents from padding closing costs. But the current law is weak, so courts
keep siding with the mortgage industry. Until Congress passes a better law, it's up to you
to protect yourself.

Years ago, when I closed on my first home, the fees were a whopping $2,000 more than I
had expected -- even though the mortgage company manager knew I was an investigative
reporter. I can only imagine how that company treats customers who don't have a title
like mine to fling around. Of course, I questioned every single line item, found several
junk fees, and got the company to knock several hundred dollars off my closing costs. Let
me fill you in on several ways the mortgage industry tries to get you.

Cleo S. wanted to refinance her home. The lender charged her $50 for a so-called
"funding fee." That's a euphemism for a simple wire transfer. First of all, wire transfers
don't cost that much. Second, getting the money to the borrower is the lender's job and
shouldn't cost extra. The lender also charged Cleo $150 for a survey, but when you
refinance, normally a survey isn't required. The title company took advantage of Cleo
too. It charged her $125 to record her deed with the county. But the county where Cleo

                                        Page 10 of 13
lives only charges $25 for that service. The fee was heavily padded -- pure profit for the
title company!

There are a couple of proposals that could reform abusive closing costs like these. One
idea is for groups of lenders, title agents, surveyors and appraisers to band together and
offer package deals. The packages would be guaranteed, so consumers could shop and
compare. These package deals are already starting to be a reality. The other possibility is
a law requiring lenders to stick to their original good faith estimates, or not stray by more
than 10 percent. Even the mortgage industry supports this proposal. That would eliminate
the bait-and-switch tactics so common today.

For now, the best thing you can do is learn the lingo and be ready to fight. Here's a
breakdown of the typical fees you will see on your closing cost bill, called a "HUD-1
settlement statement." I explain what the fees are actually for and how much they
typically cost in the Washington, D.C., area, where I live. Keep in mind these are rough
estimates. Lots of factors can make these fees higher or lower (like where you live,
whether you're a first-time home buyer, and if you have poor credit). Understanding what
the fees are for will help you bargain them down.


Do your homework:

1. Shop for mortgages through several different lenders and compare the closing costs on
their good faith estimates. Aggressively question the companies as to whether the figures
on the estimates could change. Remember, the company with the lowest estimate, could
pull the biggest bait and switch.

2. Shop around for the title agent or settlement attorney who offers the best overall deal.
Get a written quote, and if additional charges appear at closing, dispute them.

3. Forewarn your mortgage company, mortgage broker and title agent that you will not
pay padded closing costs for services performed by outside companies. Let them know
you plan to ask for receipts.

4. Scan your good faith estimate for fees that don't apply to you if you're refinancing or
buying a condominium.

5. Find out whether there's a cap on the fees mortgage brokers are allowed to charge in
your state.

6. Find out whether the current owner purchased the property less than 10 years ago. If
so, ask for a copy of their title insurance policy. Inquire about getting the reissue rate. If
the title agent plays dumb, ask which national title insurance company they represent and
call that company directly to learn its rules on reissue rates.

                                        Page 11 of 13
7. Call your local government and find out how it calculates real estate taxes. Don't let
the title agent pad those government fees.

How to Complain:

If a lender does you wrong, try your state banking division. You can contact your state
department of licensing to make a complaint against a mortgage broker. In some states
the insurance commissioner governs title agents. If your title agent is an attorney, you can
complain to the bar association.

                                       Page 12 of 13
Potential Closing Costs                  Price Range

A.) Fees Imposed by the Lender
Loan Origination Fee                     1 percent of the purchase price
Loan Discount                            The "loan discount" refers to the "points"
                                         you pay to buy down your interest rate.
Underwriting Fee                         $150-$325
Document Preparation Fee                 $75-$325
Administrative Fee                       $390-$550
Funding Fee/Wiring Fee                   $0-$30
Credit Report                            $15-$60
Tax Service Fee/Escrow Fee               $58-$89
Appraisal Fee                            $100-$500
Flood Certification Fee                  $11-$25
Hazard Insurance                         $300-$600
B.) Fees Imposed by the Broker
Mortgage Broker Fee                      1 percent to 5 percent of the loan amount
C.) Fees Imposed by Title Agent and
Settlement Attorneys
Closing Fee                              $350 for a purchase (split between buyer
                                         and seller). $150-$350 for a refinance
Settlement Fee
Abstract or Title Search                 $150-$225
Title Examination                        $0-$400
Title Insurance Binder                   $0-$50
(Title) Document Preparation             $0-$100
Notary Fees                              $7-$20
Release of Lien Fee                      $0-$100
Attorney's Fee
Courier Fee                              $0-$100
(Title) Administrative Fee
Title Insurance                          Loan amount multiplied by 0.0250 for
                                         lender's coverage. Loan amount multiplied
                                         by 0.003 for lender's and homeowner's
D.) Fees Imposed by the Government
Recording Fees
Tax Stamps
Recordation Tax
Transfer Tax

                                  Page 13 of 13

To top